Volatility Again...| March 4, 2022 - Financial Future Services

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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Markets moved lower last week, again. Is volatility telling us anything about what to expect for the next month?

Monday

We experienced a very modest day of movement on Monday. A welcomed change from the headline risk that has been accompanied with every weekend as of late. The S&P 500 lost 10 points or 0.24%.

Tuesday

Volatility picked back up on Tuesday. The implications from sanctions on Russia posed a difficult pill for markets to swallow. Early, the S&P 500 fell more than the NASDAQ as markets were pricing in a less hawkish Federal Reserve Board (FRB). The S&P 500 ended up falling 1.63%, while the NASDAQ lost 1.69%.

Wednesday

A full reversal was in order Wednesday. The S&P 500 recovered all the losses from Tuesday as it rose 1.80%. NASDAQ lagged, as has been the standard as of late, rising 1.62%. The FRB chair, Jerome Powell, testified before congress on Wednesday. During which he made it clear that a 0.25% rate hike is more likely for an opening move, not 0.50%. This was cheered by markets as a less hawkish stance than expected in recent weeks. At the same time, he also stated that consecutive hikes should be seen as normal. It felt as though the FRB chair was trying to send a message to expect that later this year.

Thursday

Markets rose on Thursday. The S&P 500 rose 1.33% on the day while the NASDAQ lagged, rising 0.04%. This is a signal that strong jobs data is expected for tomorrow. Strong data would increase the hawkishness of the FRB. This is because it would make it easier for the FRB to hike interest rates.

Friday

Happy Jobs Friday! Jobs data did not disappoint as the unemployment rate fell to 3.8% and 678K nonfarm jobs were added. The participation rate reached a pandemic high of 62.3. This is a signal that more workers are optimistic about their job prospects. The strong jobs showing is a signal that the FRB will be more concerned with inflation in their coming meeting. This makes a rate hike all but a certainty for March. With all that good news, we were rewarded with a down market. The tension in Ukraine after a standoff at a nuclear power plant was a bit much for markets to handle. Additionally, the fears of a rate hike’s impact on earnings took a toll on stock prices. The S&P 500 ended up falling 0.79% on the day. The NASDAQ sold off 1.66%.

Conclusion

The week was not great for markets as the S&P 500 lost 1.27% and the NASDAQ lost 2.78%. VIX started the year at 16.60 and has climbed as high as 33.32, which was this past Tuesday. Market volatility over the next month is now expected to be around 1.6% daily. That volatility could be reflected in gains or losses but given geo-political risks at play the latter is likely.